Cost Accounting

Cost Accounting

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Institution

 

 

Cost Accounting

Question Two

  1. Advantages and disadvantages of marginal cost plus pricing and total cost plus pricing

The main advantages of the marginal cost plus pricing are elimination of the unit cost variance, simplicity, cost control, shot term planning of profit, accurate recovery rate f overhead cost, ensuring maximum business returns, over or under absorption do not arise, concentrate mainly on controllable part of the business, and effect of sales and production may be seen clearly. On the other hand, disadvantages of cost plus pricing include ignoring the fixed costs, fails to recognize that the long term fixed cost can become variable, and overs implies cost to only variable and fixed. The advantages of total cost plus include consideration to the market factors, reduction of uncertainties and risk, and a fair method of fixing the price. The disadvantages include arbitrary allocation of cost, and ignorance of opportunity cost and competition (Kinney & Raiborn, 2013).

  1. Full Cost Per Unit Of Each Product Using Absorption Method
Product W X Y
Budgeted annual production (units) 15000 24000 20000
Direct materials 35 45 30
Direct labour 40 30 50
Total direct cost per unit 75 75 80
Total Units produced 59000
Indirect cost 1044000
Indirect cost per unit 18
Total cost per unit 93 93 98
  1. Using activity based costing
Product W X Y
material ordering costs 15 11 19
machine setup costs 295 236 590
machine running costs 34 54 47
General facility cost 27 44 35
Total 371 345 691

The difference in cost per unit between the two method is due to the fact that the absorption costing method takes into consideration every cost that is incurred by the business while the activity based costing considers the cost that is associated with given activities only.

References

Kinney, M. & Raiborn, C. (2013). Cost Accounting: foundations and evolutions. Cincinnati: South-Western, Cengage Learning.

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